Should new housing bubble fears stop home shoppers?

Rather than react with excitement and increased urgency, potential homebuyers fear rapidly rising home prices signal a new housing bubble. Does it?

California endured three large housing bubbles since the early 1970s. Each one was kicked off by a huge house price rally, inflating prices well beyond any reasonable fundamental measure. From early 2012 to mid 2013, the house price rally was just as steep as previous price surges, but not as long in duration. Cautious home shoppers fear this latest rally may signal yet another housing bubble, but rather than purchase for fear of being priced out forever, buyers wait or decide to safely rent instead.

I consider this cautious behavior a great sign for housing. In the past, realtors could have scared buyers into action or appealed to their greed, but today those tactics fail more often than they work, partly because buyers are still weary after the recent bust, and partly because realtors have no credibility. Potential homebuyers react today with fear and trepidation when prices rise for no reason, as they should. Belief in the magic appreciation fairy is dead.

To determine if a housing bubble exists, potential homebuyers need a measure of value to base their decision on. The main reason I developed the system on this site that displays the cost of ownership calculations compared to rent is to establish a benchmark of reasonable value. In short, I want to identify housing bubbles and help people avoid them. I saved many people from financial ruin by writing about the last housing bubble. If I had this site with these calculations in place back then, I could have saved many more; next time, it will be different.

The most recent data is clear: we are not in a housing bubble — at least not yet. The long-term chart below has three important lines: median resale (purple), rental parity (green), and historic value (orange). For the last nine months, those three lines have been one on top of another, strongly implying a fairly-valued market.

Analysis finds home prices are rising at an unsustainable rate and that many mortgages would not perform well under economic stress.

By Edward J. Pinto and Stephen D. Oliner, April 23, 2014, 6:47 p.m.

Even though the recent financial crisis is barely in the rearview mirror, risk is starting to build once again in both the U.S. mortgage and housing markets.

Contrary to the prevailing view that only borrowers with pristine credit records can get a mortgage these days, many risky loans are still being made.

Barney Frank, co-author of the Dodd–Frank Wall Street Reform and Consumer Protection Act, was recently interviewed about the lobbying to water down the law. He lamented that the elimination of the qualified residential mortgage standard made it possible to underwrite many sketchy home loans without endangering the banking system and running afoul of the qualified mortgage rules.

A new index published by the International Center on Housing Risk at the American Enterprise Institute measures this risk month by month, based on about three-quarters of all home-purchase loans extended across the country. And the index clearly shows that many of today’s mortgages would not perform well under stressful conditions. This conclusion holds for the nation as a whole and for nearly every state individually, California included.

Here’s why. In recent months, fully half of all the home loans covered by the risk index had a down payment of 5% or less.

With so little money down, those borrowers would be underwater with only a modest decline in housing prices. In addition, for nearly half of the recent loans, borrowers’ monthly payments on their mortgage and other debt exceeded 38% of their pretax income, the traditional threshold for acceptable payment burdens. Such borrowers could find it difficult to make their monthly payments if they came under even moderate economic stress, such as a temporary layoff or a reduction in work hours.

The Federal Housing Administration is the prime source of this risk. It now guarantees more than a quarter of the newly originated home loans, and it does so with little regard for risk. Under the banner of expanding homeownership, the FHA provides risky loans to households that often lack the resources to make the payments if anything goes wrong.

This was done purely as a bailout for the banks to prop up prices at artificially high levels to maximize the capital recovery on the bank’s bad loans — at taxpayer expense.

Home prices are also rising at an unsustainable pace. For the nation as a whole, prices increased 11% last year, according to the S&P Case-Shiller index. The jump was even larger in the major California markets: 21% in Los Angeles, 23% in San Francisco and 19% in San Diego.

Homeowners over the last two years enjoyed a significant increase in the value of their homes, despite the leveling off over the last several months.

The Fed’s easy monetary policy, which has kept mortgage rates very low, has been a key factor behind the rise in house prices. Another factor has been strong investor demand for distressed properties. At the same time, the supply of available homes has been limited.

Those three sentences nicely sum up the 2012-2013 house price rally.

Housing starts, while up from their lowest point, remain well below normal, in part because builders shed capacity during and after the recession. Reflecting these factors, house prices in the hotter markets around the country may already be above the levels warranted by household income, rents and other economic conditions.

Does this mean we are likely to see another housing bubble? That’s hard to say. Nonetheless, the risk of a price overshoot of some magnitude is especially high in California.

The need for the data on the cost of ownership found on this site will help combat the overshoot by dissuading some buyers from overpaying.

According to Fitch Ratings homes in Los Angeles, San Francisco, Oakland and San Diego are overvalued by 20% or more. Other analysts see California markets as fully valued rather than overvalued. But even if this is correct, it is worth noting that historically, many areas of California have had extremely volatile home prices.

Given that risk is rising, how should a prospective California home buyer decide whether to jump into the market? Start by comparing the price of a home you are considering to what it would cost to rent. …

I couldn’t agree more. I’m actually pleasantly surprised to see this idea promulgated in the mainstream media. Everything I’ve worked to accomplish on this site is based on that idea.

Even if a house appears to be a good deal, the more important question is whether it’s something you can comfortably afford. To gauge whether the mortgage you would be taking on is affordable, …

With house prices already up substantially from their lows, today’s home buyers need to pay close attention to risk. Prospective buyers can protect themselves by using newly available tools to analyze local market conditions, and by realistically assessing their own financial situations before making such an important decision.

Home shoppers today are right to be concerned about another housing bubble. It wouldn’t surprise me at all to see a reaction bubble form over the next few years as housing stimulus designed to bring up the non-performing markets overcooks our market. (See: Overcooking a recovery ripens a housing bubble) The tools on this site are designed to help spot this bubble if it forms and direct people to the properties with the best cost-to-rent ratio available in the market. Perhaps the new mortgage regulations will prevent future housing bubbles, or perhaps not. It’s best to be cautious and prepared.

“They hoped to prop up housing while fundamentals recovered, but the natural support for the market still hasn’t returned, so the props may be in place for a very long time.”

The natural support for housing would be rising incomes (& jobs), and that doesn’t exists. We have declining household incomes in the face of this (so-called) “recovery”, and this is something have not seen since the 1930’s.

“I believe the price will be paid in other ways, probably with a bout of future inflation once the debt write downs stop.”

I also believe we will have inflation, but not until the deflation is allowed to occur. Since 2001, we more than doubled the private debt, yet incomes are only marginally higher, therefore something has to give … I think it’s the debt.

And this is the basis of my argument as to why I think deflation will come. And no, we haven’t had deflation yet, because only a small amount of the debt was allowed to disappear during the economic crisis.

Lowering interest rates to record lows helps both businesses and consumers support the onerous debt they already carry, so that will make some debt deflation unnecessary.

When do we reach national solvency? That’s the big question. Low interest rates only go so far. The federal reserve is betting we are already there as aggregate debt levels are growing again.

Personally, I think we still have a lot of mortgage debt destruction yet to take place. The terms much of this debt is held under still isn’t stable. We have over 5 million private loan modifications, many of which will reset to higher interest rates and payments this year. Until the existing debt is on stable terms, deflation isn’t over. Perhaps they will create new debt faster than the old debt deflates, which would curb deflation overall, but it still makes for painful write downs.

I dunno. I did not say it wouldn’t. I don’t have a clue as to what it might cause. I was just thinking that if I were the Fed and it was my intention to maintain the status quo, I would buy the derivative junk from the TBTF banks and buy treasuries at POMO, and then write it down. Instead of redeeming US Treasury bonds, why not just keep ’em? Or just write ’em off as bad debt, or unwanted debt, or whatever the heck they want?

I never mentioned inflation or deflation. You seem to have a strong need to convince everyone that everything leads to deflation, like you have this paradigm on deflation and no other information is relevant.

Price decreases and asset price decreases are not deflation. Deflation is a decrease in the money supply. Or it was.

What are results if the Fed buys the bad debt for par, and writes it down on the Fed’s balance sheet?

It would unfairly reward the bank with the most toxic crap on their balance sheet. The moral hazard of that would be incredible.

That aside, it would have a positive impact on the financial system. It would wind down the federal reserve balance sheet will simultaneously removing toxic debt from the system. It sounds like a win-win except that some banks get rewarded for being terrible bankers.

“Low interest rates only go so far. The federal reserve is betting we are already there as aggregate debt levels are growing again.”

The last 30+ years, the only tool the Fed has had to keep the economy from recession (and deflation) is stimulating with perpetually cheaper interest rates (and QE). That’s over now. They used all their ammo. Rates are 0%, and after 4 trillion in QE, it’s lost its potency. QE is declining (taper), not increasing.

The Fed lost and the next stage is Deflation and debt destruction. That’s why treasuries are cheap (and gonna get cheaper), GDP growth sucks, gold has collapsed, and inflation is declining. The writing is on the wall .. it’s over.

I guess if you repeat this enough, it will become the truth. You almost have me convinced. Try a couple more times.

Treasuries are cheap? And gonna get cheaper? Are you sure about that? From what I can tell, they have been at record highs for the last couple of years. Maybe I just don’t know what I am looking at and you can help me.

“I think he means to say that yields are low and likely to get lower, and he may be right.”

That ain’t what he said. So, not only may he not be right, he is just plain wrong.

Here’s the deal. Ya got a whole bunch of smarties, (seriously smart folks), jibber jabbin’ about stuff they don’t really know about. They know something, like MR and loans, but they go off about things they know little to nothing about, like MR and gold.

Lee knows a little bit about something, most likely something he read, and reiterates it over and over as if it will achieve credibility if he just keeps saying it over and over. He does not know squat about bonds or he would not have said that “treasuries are cheap.” And the ONLY way he is going to find out that he does not know anything is to be shown how he is wrong. He does not know anything about inflation or he would not make preposterous statements like, “It isn’t inflation if wages aren’t rising.”

I don’t know if you remember, but a month or two ago, in response to all the pronouncements on this blog that interest rates were going to keep rising, I said that they would rise, but not before they went down, way down. “They” were all excited that interest rates were going to keep rising and home prices would be negatively affected. All the reasons they gave that interest rates would rise were fairly ignorant. When they were wrong, not one word about how they were mistaken.

Why are they so darn afraid to be wrong? And if you think about it, they ain’t gonna git one more little bit of understanding without first understanding that they are wrong.

Remember how for a year or so I kept saying that the Fed would never taper, and each time Bernanke would come out and say he was gonna keep things going the way they were. I was right, until I wasn’t. I had to change my mind and say it was gonna be a 50/50 chance that he was gonna taper. Well, he started tapering. All those times I said he would never taper, I WAS WRONG.

It isn’t that big a deal. I was wrong. And it don’t even hurt.

Ya know why I don’t say squat about the stock market? Cuz I don’t understand it. I know a bit about it, but can’t say diddly about it without just repeating what someone else has said and sounds good.

Yeah, they don’t have to learn, but as long as I spend time here, I’m gonna point out what they don’t know and even more, don’t understanding.

This is a lot longer than I intended, but sometimes I start writing and can’t stop until I complete the thought…

“When do we reach national solvency? That’s the big question. Low interest rates only go so far. The federal reserve is betting we are already there as aggregate debt levels are growing again.”

National solvency is a really big question, and has little to do with the housing bubble. The way I see it, we are in the middle of an economic sea-change as a result of the digital revolution. The internet bubble and the housing bubble are just results of the underlying economic upheaval.

During times of change there are transitional costs. Increases in productivity mean fewer workers are required to do the same job. Some job functions are replaced entirely. Some job functions are transferred to lower cost centers. Normally, this results in price deflation as productivity gains rise in a contracting job market, as was seen in prior industrial revolutions.

Price deflation usually results in economic growth as the employed go shopping and find that their salaries buy more than they used to despite stagnant nominal wages. In other words, real income is growing because prices are falling. Rising demand for goods and services drives up production requirements to the point where maximum capacity is reached. Further expansion can only occur if capital is invested. Demand for capital rises, and so do interest rates. Since we are not allowing price deflation to occur, globally, real income is stagnant locally.

Also, since prices are maintained higher, and the job market is competitive thereby constraining wage growth, corporate profits are higher than they otherwise would be. This is the reason for growing wealth inequality: the productivity benefits that would normally result in lower prices for everyone are only resulting in higher profits for owners of stock in a few high-growth industries.

The internet bubble was the result of individuals and groups trying to corner the digital revolution. As some companies win, others lose. These losers lost everything. The winners took the market share, and bought the IP of the losers as the industry consolidated.

The housing bubble was the result of the government and financial industry trying to prevent a collapse in prices at a time of war. By lowering effective mortgage rates through new financial products like Option Arms, and bringing these products to the masses through no-doc, no-down loans, the loss of real income was forestalled. HELOC loans and home equity loans, not to mention refi’s, put billions of dollars back into the US economy. Nominal wages rose for a while, and real income rose as well.

When the housing bubble burst in 2007, a short-term liquidity crisis resulted in 2008. The FED and the US Treasury stepped in to prevent a run on financial assets by back-stopping the private banking and mortgage industries. This explains 2008-9, but not all the government spending since then. The high levels of government debt since 2009 are preventing a price deflation from occurring. Thus real incomes are also stagnant as nominal wage growth only covers inflation. Wage growth for some high-growth industries continues to rise well above inflation, especially for those at the top.

While housing costs were falling along with rates and prices in 2011 and 2012, the economy was getting a net increase in real income from refinancing and lower housing costs. Squatting also increased real income and funneled money back into the economy. Now that we are back on the up-slope, where are real income gains going to come from? The only place they can… deflation.

When I say deflation, I don’t mean debt deflation, but price deflation. The concept of economic stability through moderate price inflation does not hold up very well in times of high productivity gains through automation and resulting job obsolescence. Prices can either fall or value can rise. Either the same for less or more for the same. Even better is more for less, but when does that happen?

Price deflation is a natural consequence of rising productivity gains. If prices don’t fall, then productivity gains don’t make it back into the general economy. If consumers are richer because they pay lower prices, then they will buy more. You can make just as much money in volume at lower prices as you can at higher prices with lower volume. If you have excess capacity anyway that you are paying overhead on, then moving volume at slightly reduced prices will add to, not detract from shareholder value.

I think the FED has it 180 degrees backwards. It’s foolhardy to force inflation when deflation is what’s required. Once deflation has run its course, inflation will begin again as hiring resumes to meet the rising demand for low-cost goods. This boom-bust-boom cycle has played out many times in the past. Deflation is a big part of the recovery. I think the FED should target moderate deflation as well as moderate inflation. Both have their place in stabilizing the economy. If the goal is to ameliorate severe economic cycles, then the FED shouldn’t limit itself to constantly rising prices.

So when do we reach National Solvency? We reach solvency when revenue exceeds spending. Revenue will exceed spending when economic activity rises significantly generating more tax revenue. Economic activity won’t rise significantly until consumers start spending. Consumers won’t start spending until prices are lower since real incomes aren’t going higher. Prices won’t be lower until the FED allows this to occur by cutting back on the stimulus.

Paradoxically, short-term rates need to rise and prices need to fall before future expansion can resume. Higher short-term rates will infuse the economy with interest income. Lower prices will infuse the economy with higher sales volumes thus creating more job demand and higher corporate profits based on higher volumes. Corporate profits will go through a anti-stimulus correction before rising further. Taper on! Target and Discount rates to rise in 2015 (I hope).

“Personally, I think we still have a lot of mortgage debt destruction yet to take place. The terms much of this debt is held under still isn’t stable. We have over 5 million private loan modifications, many of which will reset to higher interest rates and payments this year.”

The debt may be modified instead of reset or recast. The banks will continue to try to optimize their blood to turnip ratios. If debtors can afford a certain payment amount today, they can probably afford the same tomorrow. Those that can’t afford their current payment will eventually be foreclosed on and the debt will be rolled over to someone else with the resale of the property.

This has been going on for the last five years. Why would the status quo of pretend and extend suddenly change just because the original mods are about to reset to higher rates?

Would you like to contribute posts for the weekends? I’m totally serious. You put so much thought into your comments that I think you would make some great blog posts. You probably have more words in that comment than I put in an average post, and my posts are often criticized for being too long.

Contact me at larry @ ochousingnews.com if you would like to contribute.

I think the FED has it 180 degrees backwards. It’s foolhardy to force inflation when deflation is what’s required. Once deflation has run its course, inflation will begin again as hiring resumes to meet the rising demand for low-cost goods. This boom-bust-boom cycle has played out many times in the past. Deflation is a big part of the recovery. I think the FED should target moderate deflation as well as moderate inflation. Both have their place in stabilizing the economy. If the goal is to ameliorate severe economic cycles, then the FED shouldn’t limit itself to constantly rising prices.

I suspect the main reason they don’t allow any deflation is due to the interests of government. Deflation doesn’t serve government near as well as inflation. Deflation doesn’t increase tax revenues whereas inflation does. Rampant inflation increases capital gains taxes, property taxes, sales taxes, and so on. Deflation does the opposite. The federal reserve probably could manage for deflation and keep the extremes from coming to pass, but the government wouldn’t stand for it.

Market analysts are dialing back on their expectations for the housing sector this year following reports of continued sluggishness in what should have been the start of a busier season.

In a report issued earlier this week, Fitch Ratings announced it is tapering its forecast for 2014 in acknowledgement of what has so far been a “subpar spring selling season.”

Sales of both new and existing homes in March fell short of expectations, dashing optimistic projections of a rebound following the end of an unusually harsh winter. Housing starts also disappointed as homebuilders remain concerned about the shape of the market.

Looking past spring, Fitch’s report focuses on expected growth throughout the rest of the year, with housing starts and new home sales forecast to see percentage gains in the mid-teens. Average median new home prices, meanwhile, are expected to rise about 3.5 percent, a substantial moderation from growth over the past two years, which was largely seen as unsustainable.

However, even with early numbers coming up short, with two months left in the season, some commentators are saying it’s too early to write off spring as a disappointment just yet—including Bob Curran and Robert Rulla, directors and homebuilding analysts at Fitch.

“The biggest message that we put out was that we do see so far … that [spring data] is disappointing relative to expectations,” Curran said. “[I]t was a very good spring last year, so the comparisons are kind of tough.”

Over the coming months, Curran says he expects to see more favorable year-over-year comparisons.

Furthermore, while data released so far might not be stacking up well against forecasts, Rulla sees little reason to be skeptical about summer projections: “There’s a little bit more caution given what transpired the first three months of the year, but we think that there’s still going to be growth in the overall housing market in 2014.”

As far as March’s low sales numbers are concerned, one thing to keep in mind is that inventory remains limited across the country and is especially weak in certain areas.

“Interpreting low sales volume in March as bearish—we think that’s misguided,” said Mike Simonsen, co-founder and CEO of real estate data firm Altos Research. “It doesn’t tell you anything about the actual demand for those homes. You can’t tell how many people want to buy homes by how many are sold.”

By Altos’ measure, the housing cycle is set to peak at the end of June before falling off into the fall and winter, as it does every year. Using that “map,” Simonsen says the company has good visibility on what the year as a whole should look like and predicts a 10 percent increase—an optimistic outlook compared to most others.

Meanwhile, at Clear Capital, the company is terming the latest slowdown in price changes “the new normal.”

“Even though we’ll see improved housing metrics across the board this summer, it won’t be the banner year that 2013 was,” said Dr. Alex Villacorta, VP of research and analytics for the company’s Data Division. “I think it’ll be more measured, [and] I think it’ll be more localized … it may not show up in the national housing metrics numbers, but it certainly will be in certain markets.”

For the near future, Villacorta says the numbers to watch will be those in the mid-tier housing segment, where the most housing activity traditionally takes place. That happens to be a particularly weak area, though he believes even a small boost in the next month or two will help put the market back on more stable footing compared to the year’s early months.

“I think just seeing the signs of activity may turn the tides of confidence in consumers,” he said. “Probably in about 45 days, we’ll know what’s happening in spring fully.”

According to a report released this week by LendingTree, down payment percentages for 30-year fixed-rate purchase loans fell in the first quarter to an average of 15.78 percent, down from just higher than 16 percent in the last quarter of 2013.

At the same time, the company found average credit scores for borrowers matched with lenders on its own network have dropped 6 percent year-over-year, opening up the credit pool a little more.

“As the housing market improves and refinance activity declines, lenders are adapting their guidelines to improve credit accessibility for borrowers,” said LendingTree founder and CEO Doug Lebda. “Relaxed lending guidelines translates to a larger pool of qualified homebuyers that could boost the housing recovery.”

Out of the top 10 states offering the lowest down payment percentages to borrowers, North Dakota reigned with an average percentage of 12.31 percent. At the bottom of that top 10 range was Idaho with 13.81 percent; most of the list fell below the 13 percent mark.

At the far end of the spectrum, New Jersey took the top spot for the highest average down payment at 19.36 percent, followed by New York, California, Connecticut, and Hawaii.

Of course, some of the states with the lowest down payment percentages also happen to be the states with the lowest borrower health scores, as measured by LendingTree—while the opposite is true for those with higher percentages.

For three straight quarters, California foreclosure starts remain little changed, hovering at a level last seen in early 2006. According to a market study released by DataQuick, steady economic growth and higher home values are responsible for the steady pace of new foreclosures.

Lenders and servicers in the first quarter of 2014 recorded roughly 19,000 notices of default on California house and condo owners, up 6 percent from the previous quarter.

Compared to peak numbers of roughly 135,000 in Q1 2009, foreclosure starts have dropped significantly over the intervening years. However, DataQuick posits that the numbers could be misleading.

“It may well be that the foreclosure starts in recent quarters don’t reflect the ebb and flow of financial distress as much as they reflect a steady state of workload capacity on the part of the servicers. They may well be just working their way through a backlog, stacks of paper piled high on desks,” said John Karevoll, DataQuick analyst.

This year’s first quarter was the first to see a year-over-year increase in default filings since 2009, but that gain can be attributed to new laws in California, known as the “Homeowner Bill of Rights” which took effect in January and February of last year. The laws caused lenders and services to pause, artificially decreasing notices sent to homeowners and pushing foreclosure start numbers downward.

DataQuick points out that most of the loans in California going into default are still from the 2005-2007 period. The median origination quarter reported by the company for defaulted loans is still the third quarter of 2006, noting that weak underwriting standards peaked in that period of time.

California homeowners were a median 9.8 months behind on their payments when the lender filed the notice of default. Borrowers owed a median $22,538 on a median $301,732 mortgage.

The most active companies in the foreclosure process last quarter were Wells Fargo (2,834), Bank of America (1,637), and Nationstar (1,282).

“The trustees who pursued the highest number of defaults last quarter were Quality Loan Service Corp (for Wells Fargo and others), MTC Financial (Bank of America, Greentree, JP Morgan Chase) and Western Progressive (OCWEN and Deutsche Bank),” DataQuick said.

The report contends that 50% of potential homebuyers aren’t shopping for homes because they fear they won’t qualify for a mortgage, with the implication being that they really would qualify. Perhaps, these people know they won’t qualify because they have bad credit, and that’s why they aren’t shopping. The demand isn’t pent up, it simply doesn’t exist because the really won’t qualify for a loan.

No matter which metric, study, or chart you read right now, the indication is clear. The housing market looks to be in for a rough year. Tight credit standards are making it impossible for many willing buyers to purchase a home and the impact is being felt throughout the industry.

New home sales are down, mortgage activity is down, and Shaun Donovan, secretary of the United States Department of Housing and Urban Development, told a group this week that tight credit and the lack of private capital is leaving “10-15%” of borrowers behind.

But new data suggests that the problem might be much worse than that. Increasingly tight credit standards and fear of rejection are keeping nearly half of the potential buyers out of the market because they’re afraid they won’t be able to qualify for a mortgage. The game is over before it’s even begun.

As Pamela Hughes Patenaude of the Bipartisan Policy Center wrote Friday on HousingWire, the average credit score on loans to purchase homes in 2013 was 750, which is 50 points higher than it was ten years ago.

And as the credit standard rises, more buyers are just simply giving up on buying a home. Fear that they will not qualify for a mortgage has stopped 46% of potential homebuyers from pursuing the financing they’d need to buy a home, according to a national survey from loanDepot.

The survey also says that half of all Americans don’t even know what the minimum required FICO score is to qualify for a loan. And with 30% the population saying they’d like to buy a home in the next two years, that’s an enormous segment of potential buyers being left behind.

The fear of rejection is keeping potential buyers from even taking any steps to see if they could get a home loan. Of the 30% of the population who want to buy a home in the next two years, 74% haven’t pursued a mortgage or taken any action to see if they could get a loan at all.

All of the negative headlines about credit are affecting potential buyers. According to loanDepot’s data, only 18% of all Americans believe it’s easier to get mortgage now compared to a year ago, and 43% of people think it’s harder.

According to loanDepot’s data, fear of being unable to qualify for loan is affecting younger buyers more than any other age group. Nearly half (48%) of all potential homebuyers who don’t currently own a home are between the ages of 25 and 34, many of whom are potential first-time buyers. In fact, the market share of first-time buyers has declined from 54% of all sales in March 2009 to 28% in February 2014.

So as the negative headlines about the housing industry continue to pile up and we wonder where the buyers went, look no further than the credit standards. They’re keeping half of the buyers away.

That’s the truth. Many people who ordinarily would be selling their homes right now can’t because they are underwater. Those houses are not on the market today, and they do represent pent-up supply that will someday come to market.

Maybe we’re too preoccupied with bubbles, after all, prices can drop whether there’s a bubble or not. For example, what happens when interest rates normalize but wages remain stagnant?

I would assume that demand for housing would weaken which would reduce sales and (eventually) prices.

Trend lines don’t always help either, mainly because they indicate the slightly-upward trajectory of a normal market. But are we in a normal economy or a long-term slump? Gallup polls say that a clear majority of the people surveyed, think we are still in a recession.

First time buyers aren’t at all concerned about a bubble forming. That’s more of an academic debate for the old salts that have been following housing since the last bubble.

Today’s buyers are more concerned with being outbid by all-cash investors, or not being able to afford the house they really want. I have several friends and family that have purchased in the past year, and most of them were upset about how difficult the process was, and how little inventory there was to choose from. Most had to substitute down to a property that was less desirable than the initially hoped to acquire.

Most had to substitute down to a property that was less desirable than the initially hoped to acquire.

This is what happens more often than not. There is a limit to how far this can go, but the downward substitution effect could easily inflate prices 10% to 20%; in fact, much of the historic premium in many OC towns is likely due to this phenomenon.